What a difference a museum makes. Less than a decade ago, Bilbao was arguably one of the backwaters of Europe, a relic of industrial decline where empty shipyards, rusted cranes and vacant steel mills lined the banks of the city’s polluted waterfront. Along came the Guggenheim Museum and from 1997 Bilbao rose from its ashes to become one of Europe’s most prosperous and dynamic cities, the thriving capital of Bizkaia, one of the three provinces that make up Spain’s autonomous Basque Country.

The daring titanium plate structure of the Guggenheim, designed by US architect Frank Gehry, immediately became synonymous with economic regeneration. The museum represents what officials call the “multiplier effect”. It has generated nearly E1bn in income since its inauguration, contributing about E150m in revenue to the Basque government. The knock-on impact has given rise to a staggering array of initiatives, starting with a state-of-the-art new airport, which is the creation of celebrated architect Santiago Calatrava and is deemed essential to cope with the flood of foreign visitors arriving to visit the museum and partake in the city’s vibrant life.

Speedy progress

The Guggenheim was just part of a breathtaking succession of developments that included a metro system designed by Sir Norman Foster, a sleek tram network, a E440m exhibition centre, a E500m expansion and renewal plan for Bilbao’s port, new luxury hotels by Sheraton and other international hoteliers, plus dozens of designer shops and new restaurants. Bilbao now sits at the centre of a $10bn infrastructure improvement plan aimed at making the Basque region the axis of the “Mediterranean Arc”, the coastline countries stretching from Ireland to the Mediterranean.

Along with the tourists came investors praising Bizkaia’s infrastructure improvements and facilities upgrade. “Our relationship with Bizkaia and the Basque Country been consistently extremely close, wide ranging and profitable,” says José Antonio Garay, a former president of JPMorgan Chase in Spain, which chose Bizkaia as its location.

Official support

“We have received every type of co-operation and encouragement from the local authorities to develop and consolidate our business base here. When we made the decision to set up a Spanish banking subsidiary in Bilbao, it was based on the long-term view we hold both on the promising financial future of the Basque Country and its enormous potential to develop into one of Europe’s wealthiest regions,” he says.

Siavosh Dehdashti, chief executive of Power Management S.A. General Electric, decided to set up a plant in Bizkaia. “We are not only glad we made that decision, but we are diversifying and expanding our business, making new investments and enjoying the advantages the local government offers us,” he says.

The rebirth of Bilbao has put the city back on foreign investors’ radar screens so that today 62% of all foreign companies operating in the three Basque provinces are located in Bizkaia. The Basque Country has slightly more than two million inhabitants, of which roughly half live in Bizkaia and, of those, roughly 90% live in Bilbao’s greater metropolitan area. With only 5% of Spain’s population, the Basque Country produces half of the country’s capital goods and steel, 90% of speciality steels, 85% of its machine-tools, 65% of its metalworking output, 25% of the aerospace industry, 40% of white goods, 12% of electronics and telecommunications, and 25% of its environmental services.

Bizkaia has transformed itself from an industrial wasteland of labour-intensive heavy industry into one of Europe’s most progressive and efficient economies. Per capita income ranks 105% of the EU average, its industrial production index is 134.5% in the same context and the region has achieved a 130% degree of openness compared with its European competitors.

Production growth

In terms of productivity, the Basque Country, led by Bizkaia, registered an inter-annual level of growth of 1.7% in the first three quarters of last year, well ahead of the national average. GDP growth is forecast to rise between 2.5% and 2.7% this year compared with 2.2% in 2003, well in advance of the EU’s expected 1.8% average growth level. Capital investment and tourism, with increases of 3.4% and 5% respectively, were two of the strongest drivers of growth.

The major international credit rating agencies have taken note of the dynamic levels of growth achieved by the Basque Country. Moody’s, for instance, assigns the region an Aa2 rating with a stable outlook, while Standard & Poor’s gives it an AA rating.

“The Aa2 rating reflects the sound budgetary position of the Basque Country,” says Moody analyst Gabriele Baur. “In past years, sizeable growth in operating surpluses has helped to fund investments without recourse to higher debt. In fact, debt has been reduced annually since 1998. The fact that the government did not succumb to a major spending spree because of buoyant revenues constitutes a major positive factor.”

Fiscal flexibility

One of the factors that distinguishes Bizkaia and the Basque Country from Spain’s other regions is a much higher degree of flexibility in fiscal matters. This is also a major incentive for attracting FDI. The Bizkaia fuero (ancient law) is a veritable Magna Carta dating back to the 15th century. The Basques were allowed to retain these special rights when the Spanish Constitution was drawn up in 1978 following the death of dictator Francisco Franco. Under these laws, Bizkaia is able to offer investors a lower rate of corporate tax than the prevailing national 35%, subject to negotiation with the local government. This fiscal and economic independence has helped to build a strong and efficient corporate sector that enjoys short lines of communication with the government and a wide range of fiscal and tax incentives.

“Given the size of our region, we have no choice but to operate an open economy,” says José María Vázquez Eguskiza, chairman of CEBEK, the Bizkaia employers’ association. “Basque companies have a long tradition of venturing outside our territory to learn new business methods and observe what is happening in the rest of the world. Our first industrial revolution gave rise to a prosperous iron and steel industry. We then developed a shipbuilding industry to export this mineral, followed by a thriving banking and insurance sector to finance industrial production and insure the goods that were transported abroad.”

Trade with Europe

Bizkaia developed a unique trading relationship with Europe, in particular with Britain and its navy, which was supplied with Basque timber and coal. All went well until the 1980s, when the massive restructuring of European economies meant that steel and shipbuilding could no longer remain the mainstays of Bizkaia’s commercial life if the region were to remain competitive within the EU. During the following decade, Bizkaia’s economy underwent a radical transformation, from labour-intensive heavy industry to services and technology. At the same time, some of the old industries, such as steel, were reconverted into slimmer and sleeker operations that were capable of competing in new markets for products such as stainless steel.

“We have now entered a new era in which we have to compete not only with other European producers but also confront the challenge from countries like India and China,” says Mr Eguskiza. “Once again, our business leaders will have to travel abroad to find out what is happening in these huge markets and how to offer a more competitive product. We at the employers’ association want to encourage this trend and we work hand-in-hand with the government. Given our good relationship with the local authorities, we can take our problems and ideas directly to the regional government and not have to use the newspapers as a medium to get our message through.”

The creation of a number of economic clusters had led foreign investors to set up joint venture projects with the regional government or local Basque companies. The energy cluster, for instance, has attracted investment from BP-Amoco, ABB, Alstom Power, General Electric, EDP and ESB, among other multinationals. Ford, General Motors, Volkswagen, Daimler-Benz and other auto makers with assembly plants in Spain rely on Basque companies for components, while Sun Chemical and Air Liquide are involved in Bizkaia’s petrochemical industry.

FDI challenge

One of Bizkaia’s biggest challenges is to promote FDI in new economy sectors – 78% of foreign investment is still concentrated in traditional industries, mainly chemicals, metalworking, construction equipment and other manufacturing sectors. The bulk of this investment comes from Germany, France, Italy and the US, which account for 60% of all FDI in the region. More than a third of foreign companies operating in the Basque Country have acquired local operations, while 29% are start-up ventures. Most have come into the region in the past 15 years.

Bizkaia’s high level of fiscal autonomy ranks as one of the region’s key competitive factors. The scope for self-government is almost unrivalled within the EU. The local government institutions are able to fund their projects out of local resources, with the raising of domestic funds of more than E9.4bn a year. Government incentives and subsidies, especially for R&D, are listed as the main economic factor in attracting FDI. Foreign investors are also positive about the region’s infrastructure offering in port facilities, airport, road network and telephone system, which get an approval rating of “good” in 53% to 66% of the cases.

As for setting up companies, the government is prepared to grant incentives for projects that create new jobs, improve the environment and contribute to saving energy, and provide professional training for Basque workers. One of the most unique features in the programme of fiscal incentives is a corporate tax level on average five percentage points below the 35% national average, a practice that for some time has been a bone of contention with Madrid.

The openness of the Basque authorities and short, efficient lines of communication are also cited as decisive factors contributing to the success of FDI ventures, with the result that 28% of foreign companies polled say they have achieved a level of profitability above expectations, while another 39% have satisfactorily met their targets.

Bilbao’s Quality of life

All indicators point to Bilbao as one of the most desirable of European cities in which to live and work. Last year, the city was the recipient of an EU quality of life award, following a survey that ranked it as the place best liked by its citizens among Spanish cities.

In spite of the terrorist activities of Euskadi ta Askatasuna (ETA – the Basque separatist organisation), Bilbao consistently comes out top in national opinion polls as having the lowest level of street crime of all big Spanish cities. The Bizkaia government spends roughly 50% of its annual budget on social infrastructure improvement projects, such as the city bus network, underground system and sports facilities.

Within the past five years, major urban regeneration projects have been launched in the city, such as the Euskalduna Conference and Performing Arts Centre, which last year won the World’s Best Conference Centre Award from the International Conference Centre Association. Another major asset is the E115m Zubiarte commercial and leisure centre, which will shortly be opened by its promoter, ING of the Netherlands, and the developer Sonae Inmobiliaria.

As for the hotel offering, Condé Nast Traveller ranks two new Bilbao establishments, the Gran Domine and the Hotel Miró, among the top 50 worldwide.

The city boasts more than 20 museums, pedestrianised shopping areas in the new and old quarters, two universities, English, French and German schools, Europe’s most modern underground and tram systems, Spain’s newest and third largest airport, an 18-hole golf course and the country’s most celebrated cuisine.